Lessons from Interviews of Pre-Eminent VCs in 2000

In 2008, when I started working at Redpoint I knew very little about how the venture business worked, and before I started at the firm, I wanted to prepare by learning as much as I could about the industry. Unfortunately, not much was written about venture capital at the time.

In fact, I found only two books: a textbook on private equity and venture capital by HBS professor Joshua Lerner, and an out-of-print collection of 32 VC interviews called "Done Deals," published in September 2000. I bought a second-hand copy on Amazon and read it cover to cover.

This past weekend, I opened Done Deals again for the first time since I started at Redpoint, some six years later. It was surreal to read the interviews again because some of the quotes, particularly the ones about competition aptly describe today's environment. And other statements are pure anachronisms. I've copied my favorites below.

Bob Kagle, Benchmark

I was at TVI for 12 years. In early 1995 we decided, as a group, not to raise another fund together. It was a collective decision in which we, in some sense, decided to declare victory, because the partnership had been tremendously successful...I think at one point in time we had 25 companies each with a $250M market cap.

Corrected for inflation, the $250M in market cap is about $375M in 2014 dollars. While those 25 companies' valuations may still not seem that enormous in today's environment, the key difference is fund size. TVI's funds were much smaller that the multi-hundred million dollar funds typical of institutional investors today.

Louis Borders of Borders Books is launching a company by the name of Web Van. If you think of groceries and drugs and general merchandise that are brought to your door in two hours, you'll have the idea. ..It's a business when Web orders is an absolutely pivotal enabling technology.

It's like deja vu all over again with the number of local delivery companies. The only difference is today, we might replace the word Web with mobile.

Ann Winblad, Hummer Winblad

In the early 90's, we took companies public only if they had four or five quarters of profit, with 20% growth per quarter in revenue and earnings. Several of our companies were the first in the 1990s with billion dollar market caps.

What a difference 15 years make. Most of today's IPOs are substantially larger and more sophisticated companies larger than in the late 90s. The typical 90s venture backed IPO generated $20M in trailing twelve months' revenue compared to the roughly $75-$100M today. One key difference is in the public markets which seem to prefer management teams to operate their businesses with negative net income to grow faster.

By mid-1999, $300M was being invested in Internet companies each week.

Just to put this in comparison to the beginning of the dot-com bubble, in Q2 2014, VCs invested $208M per week in internet companies. By my estimates, VCs are investing less than 1/3 of of the roughly $100B deployed in 2000.

Mitch Kapor, Accel

The business plan that Sevin Rosen had invested in projected first-year revenues of $8 to $10M. My first plan was $3M to $4M, but I raised the estimates. We actually did $53M in revenue in the first year. In 1983 dollars! And then we tripled that in '84.

Mitch Kapor founded Lotus. Reading through the book now, I have a much greater appreciation for the rate of revenue growth Lotus at launch. I don't know of any company since that has achieved that growth rate or first year revenues.

Don Valentine, Sequoia

A lot has changed in the venture business since we first began. The nature of deal-making has changed, as has pricing. People are willing to pay higher prices because they feel that the public markets and company buyers are willing to pay more. The business is much more competitive, and people are constantly bidding against each other.

Just as true now as back then.

John Doerr

By 1990, Intuit had one million happy customers and revenues of $33M. Then Scott [Cook] decided it was time to take Intuit to the next level...KP invested $4.7M for 12% of Intuit... our $4.7M never went to the company's bank account, but purchased shares directly from the company's founders.

The terms at which a software company raised capital back then were completely different. Intuit would generate $122M three years later, growing at least 90% per year, with $14M in net income. The company raised $5M at $40M post, or just about 1x revenues, compared to today's SaaS companies which trade at 6-10x revenues

Reid Dennis, IVP

In 1952 to 1953, I was the only person working in the financial district of San Francisco who was trained as an electrical engineer.

Learning about the industry through the words of the investors who have seen it through decades is fascinating. Today, there's much more written about the industry: more statistics, more bloggers, more books. And that collective history will only serve to benefit entrepreneurs and investors alike.

21 July 2014

Y

Read this next: